Meredith Whitney: Government Case Against S&P ‘Hard to Believe’

She discussed the governments case against the ratings agency, her municipal bond call and her thoughts on new Citigroup CEO Michael Corbat.

By John Sullivan|February 07, 2013 at 08:10 AM

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Meredith Whitney said Citigroup CEO Michael Corbat has left people "uninspired." (Photo: AP)

Meredith Whitney appeared on “Bloomberg Surveillance” Thursday morning to discuss the government’s case against Standard & Poor’s, her municipal bond call and her thoughts on new Citigroup CEO Michael Corbat.

Whitney said, “We don’t really know Mike Corbat’s agenda…He didn’t give us an agenda and he didn’t even give us a time stamp for when he’s going to give us an agenda, so it left people a little bit uninspired.”

Of her muni bond call, Whitney said, “What I am most concerned about it is the lack of health of different states. This issue of state arbitrage where people are voting with their feet. That is very clear. You have net emigration from California for the first time in 150 years.”

On whether the government has a valid case against Standard & Poor’s:

“I was surprised what source of the government this came from. Very surprised. I was surprised that—you find emails at S&P. You could find emails at any company want to.”

“The case of the government is that S&P actively defrauded investors. I find that very hard to believe, and I think it will be very hard to prove. But guilty until proven innocent. To me, it is disturbing on so many levels. $5 billion? What was the settlement case with Henry Blodget and Merrill Lynch? It was not $5 billion. It just seems curious.”

On whether the U.S. government should be focusing more on the banks instead of the ratings agencies:

“The Federal Reserve had it wrong. It had housing wrong. Every government agency had housing wrong. Everybody thought that home prices would not go down because they have not gone down since the Great Depression. It sounds similar for the municipal bond world. But the idea is, things happened. There was a perfect storm of events.”

“I think the government has to be very careful about what they’re doing to the bond market. Moody’s and S&P are so entrenched within the bond market that most pension funds have to have their rating in order to buy their bonds. If you are disrupting the bond market, you are doing some very damaging things because the system is so tightly structured. Unintended consequences is something they should be very focused on.”

Whitney on Citi CEO Michael Corbat and how different Citi is from its previous regime:

“We do not know yet. What we do know is Mike O’Neill’s history, he’s the chairman. He likes to downsize, he likes to sell stuff. We know his agenda. We do not know Michael Corbat’s agenda. he did not give us an agenda or even a time stamp for when he’s going to give us an agenda, so it left people a little bit uninspired.”
On what bank stock investors should own right now:

“I think that Citi does ok, but I think Bank of America is the stock to own this year without a doubt. There is so much financial leverage with that name. They will return, I think, over $4 billion in buybacks. It could be $5 billion in buybacks this year and really move the needle. I think that stock easily goes to 15 in the next six to nine months.”

On which bank is having the hardest time justifying its cost base:

“They all are. They’re all running at excessive expense ratios. Bank of America, in 2010 announced its cost-cutting initiatives, and two years later we’re only starting to see results…It takes a long time…The point is, if you’re not on top of it now, you will be behind the game.”

On Bank of America CEO Brian Moynihan’s management style:

“It is block and tackle, understated. People underestimate him, which is the advantage that every CEO should look for. It has cost him in the past, but I think it is really going to help him. I think he will look terrific this year.”

On whether American banks could raise capital easily right now if they had do:

“They would get it done, but it is expensive. It would be very expensive for Bank of America and Citi, who are trading below tangible book. It is more penalizing to the stocks that you described that are on the bottom. The message that is not getting across here is raise more capital, but the banks can still make money with higher capital levels, they just have to reprice their loans and products. If you look at banks in Turkey, in South America, they have much higher capital levels, but they are lending at a higher rate, and they are pricing their products in a way that incorporate higher capital. This is what is frustrating for me about the U.S. system. Loans in the U.S. are still so underpriced. The financial markets are still so gummed up in many cases. And certainly in the consumer market, because banks are not pricing appropriately for risk.”

On whether she can say all clear on municipalities and states:

“No, it is not all clear or better in any way. Governors go in to the fiscal year making expectations on revenues. For California, New Jersey, and other states, many times those revenue expectations are overly optimistic. You can say we will have a surplus in five years, but until that surfaces, it is meaningless. What is happening is a negative feedback loop that is so dangerous in this country. When you have lower tax receipts, there’s less money to spend on education and infrastructure. That has hit California and other states hard. And it breaks down the social fabric of the country. To suggest that tax receipts are above where they were in 2008 is just incorrect.”
On whether she has new confidence in the market:

“No, the correlation between the municipal bond market and the treasury market is over 90%. The fact that treasuries are yielding price up, yield down, it is a supply-demand issue. It has little to do with the fundamentals. In the central corridor, you have extremely strong demographic trends, tax receipts trends, but in the areas that you call post-developed areas—like California, Illinois, New Jersey—you have real strains in the economy. And New York to a certain extent as well. as Wall Street fires people, as FedEx fires people, that cost the states. Employees are contributing less to the tax base.”

On what her biggest concerns are for state and local governments:

What I am most concerned about it is the lack of health of different states. This issue of state arbitrage where people are voting with their feet. That is very clear. You have net emigration from California for the first time in 150 years. Florida is going gangbusters in terms of attracting hedge funds, movement from people who are tired of having their taxes raised again and again. you have intense competition between states in the Midwest as Illinois raise their taxes and other states are trying to lower their taxes. Those are the issues. in terms of municipal bond credits, that is such a smaller market in terms of the overall economy and how it affects equity and companies.”

On how her municipal bond call links to outright economic growth:

“I think I’ve gotten so much attention on a municipal bond call. That is not my area of interest. The municipal-bond area will be affected, as are pensions, as are social services. The issue is that the U.S. is rebalancing itself. Tax receipts are falling on the coast and rising in the central part of the country. You have 0.1% GDP growth, but you have emerging-market GDP growth in certain states. It is a rebalancing.”

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